India’s different growth model

Rajiv Kumar and Pankaj Vashisht of ICRIER have a nice paper reviewing Indian economy pre, during and post crisis.

There are couple of key points in the paper:

During Crisis:

India avoided the direct impact of the crisis as banks were sound

However, indirect impact in form of FII outflows and volatility played a major role. Exports declined and investments followed given rise in global uncertainty.

Economy declined to touch 5.8% in H2 2008-09 from 7.8% in H1 2008-09.

However, it was still positive as services remained robust. Most services are non-tradeable and hence limited impact. Industry slumped as much is tradeable

However, other East Asian economies saw decline in services as well because of higher share of foreign trade related services. In India too the foreign tradeable services like transport, communications etc declined. Buut domestic nontradeable services like finance and community services (because of fiscal stimulus) increased.

Policies in crisis:

The electoral cycle clashed with the global crisis. Hence govt could pass an election oriented budget/stimulus without much concern. Deficits shot and FRBM ignored in the name of global recession. It was like killing two birds (slowdown and election spending) with one stone (fiscal stimulus)

Monetary policy acted swiftly cutting rates to lowest levels

After crisis:

Economy is back on track. Authors expect economy to grow by 9% in 2011-12.

There are risks – inflation, current account deficit and global economies are still vulnerable

The authors point India has a different growth model and has some lessons for Asia:

India has recently emerged as one of fastest growing Asian economies, but with a growth model that is quite distinct from the export-oriented strategy adopted by other rapidly growing Asian economies. While all East Asian economies have derived a predominant part of their growth from external sources, both in terms of foreign capital and export market, India’s growth has mostly come from its internal sources. This is shown rather dramatically by comparing the contribution of net exports to GDP growth in the People’s Republic of China (PRC) and India (see Table 2). India has managed to grow at reasonably high rates despite consistently generating a large trade deficit, which has been made up principally by the surplus on the invisibles account (see Table 10). This highlights the role that services exports, principally software exports, have played in maintaining an external sector balance for India and in sustaining high GDP growth rates as well.

This model has helped India grow despite a huge global crisis. However, there are problems and couple of things need to be done to sustain this growth:

Growth leading to more employment

Shift of agri labour to more productive services labour

Education

Research & Development

Reforms in delivery of public services

This para on R&D comparison with China is interesting:

India cannot possibly hope to compete effectively in the emerging global knowledge economy if the country’s education sector remains underdeveloped (see Dahlman and Utz 2005). A comparison with the People’s Republic of China (PRC) is instructive.

India’s adult literacy is 61%, compared with the PRC’s 91% (see World Bank 2008). Expenditure on education as a percentage of total public expenditure is 10.7% and 12.8%, respectively, in India and the PRC.

The latter has 708 researchers per million people as compared to 119 in India.

In 1985, the number of PhDs in science and engineering in India was 4,007 and just 125 in the PRC; but by 2004, the PRC had 14,858 PhDs while India had increased the number to only 6,318.

In 2007, Indians filed 35,000 patents compared to 245,161 patents by the Chinese. The PRC allocated 1.34% of its GDP in 2005 on R&D (which incidentally is well below 3.6% in Korea), compared to barely 0.61% in India.

The country has only 12,000 vocational training institutes compared to nearly 500,000 in the PRC, which sends more than 19% of its youth onto higher education. In India, on the other hand, just 11–12% of students attend colleges and universities (Guruswamy 2010).

A nice paper. People can use it for reference to work on Indian economy during 2007 crisis…